In pursuance of Government's commitment to further facilitate Indian industry, Indian Government has permitted access to FDI through automatic route, except for a small negative list. Latest revision to further liberalize the FDI regime are as under:

• The FDI policy for the defence sector has been reviewed and as per the revised policy, the composite foreign investment up to 49% is allowed through government route (FIPB) and beyond 49% with the approval of the Cabinet Committee on Security (CCS) on case-to-case basis wherever it is likely to result in access to modern and state-of-the art technology in the country. Besides, the restrictions such as single largest Indian shareholder to hold at least 51% equity and complete restriction on Foreign Institutional Investor (FII) existing in the earlier policy have also been removed to facilitate investment in the sector.
• Preference to 'Buy (Indian)', 'Buy & Make (Indian)' & 'Make' categories of acquisition over 'Buy (Global)' category, thereby giving preference to Indian industry in procurement.
• To establish a level-playing field between Indian private sector and the public sector, the anomalies in excise duty/ custom duty have been removed. As per the revised policy, all Indian industries (public and private) are subjected to the same kind of excise and custom duty levies.
• The Defence products list for the purpose of issuing industrial licences (ILs) under IDR Act has been revised and most of the components, parts, sub-systems, testing equipment, production equipment have been removed from the list, so as to reduce the entry barriers for the industry, particularly small & medium segment.
• Process of applying for Industrial License (IL) and Industrial Entrepreneur Memorandum (IEM) has been made completely online and this service is now available to entrepreneurs on 24X7 basis at eBiz website without human interface.
• Guidelines have been issued to streamline the processing of applications for grant of extension of validity of Industrial License. The initial validity of the Industrial Licence granted under the IDR Act has been increased from 3 years to 7 years with a provision to further extend it by 3 years on a case-to-case basis.
• The 'Security Manual for Licensed Defence Industry' has been issued. With the issue of the Security Manual, the requirement of affidavit from the applicants, has been done away with.
• Partial commencement of production is treated as commencement of production of all the items included in the license. Restriction of annual capacity in the Industrial License for defence sector has been removed.
• Licensee has been allowed to sell the defence items to the government entities under the control of MHA, PSUs, state governments and other defence licensee companies without approval of Department of Defence Production.
• Application forms for Industrial License & Industrial Entrepreneur Memorandum have been simplified.
• To promote the participation of private sector, particularly SMEs for defence manufacturing, outsourcing and vendor development guidelines for DPSUs and OFB have been formulated and circulated to them. The guidelines mandate that each DPSU and OFB to have a short-term and long-term outsourcing and vendor development plan to gradually increase the outsourcing from private sector including SMEs. The guidelines also include vendor development for import substitution.
• The Standard Operating Procedure (SOP) for the issue of No Objection Certificate (NOC) for export of military stores has been revised and put on the website. Under the revised SOP, the requirement of End User Certificate (EUC) to be countersigned/ stamped by the government authorities has been done away with for the export of parts, components, sub-systems etc.
• The list of military stores has been finalised and has been put in the public domain to make the process transparent and unambiguous. The process of receiving applications for NOC for export of military stores and for issuing NOC has been made online to reduce the delay and to remove human interface in the process.
• The advanced version of NIC Code (NIC 2008) has been adopted, which is a highly contemporary industrial classification.
• Recognising the need for promotion of defence exports to make the Indian defence industry economically sustainable, Defence Exports Strategy outlining the various steps to be taken, has been formulated and is put up in public domain.

However, India still has a heavy regulation burden among other countries, e.g the time taken to start business or to register a property is higher in India. In a bid to boost FDI inflow in India there is an ever increasing effort towards simplifying the procedures and regulation burden.

Foreign Institutional Investors

Foreign institutional investors (FIIs) can invest in all securities traded on the primary and secondary markets in India.

• FIIs can invest in the equity and debt of listed and unlisted companies, government securities, and the shares, debentures, warrants and schemes floated by domestic mutual funds.
• There is no restriction on the volume of investment. However total holdings by FIIs in a company must not exceed 30 per cent, and total holding of a single FII or FIIs of the same group are subject to a ceiling of 10 per cent.
• To undertake these activities, FIIs are required to register with the Securities and Exchange Board of India (SEBI), the nodal regulatory agency for securities markets. In addition, FIIs need to comply with certain foreign exchange regulations for which they need to file an application with SEBI which obtains the requisite approval from the RBI.
• Disinvestment is allowed through stock exchanges in India, including the Over The Counter Exchange. In exceptional cases, SEBI can permit sales other than through stock exchanges, provided the sale price is not significantly different from the stock market quotations, where available.

India is among the world’s fastest growing economies and remains a top market for foreign direct investments (FDI) globally.

According to the Department of Industrial Policy and Promotion (DIPP), total FDI investments in India in the first nine months of fiscal year (FY) 2019 (April – December 2018) were approximately US$ 33.5 billion. The services sector attracted the highest FDI equity inflow of US$ 6.5 billion, followed by computer software and hardware – US$ 4.9 billion, and telecommunication – US$ 2.2 billion.

The top sources for the FDI were Singapore, with US$12.9 billion, Mauritius US$6 billion, Netherland US$2.9 billion, and Japan US$2.2 billion. Mauritius is a favorite hotspot for foreign investors, Indians living overseas, as well as Indian companies to route money into or out of India.Government has put in place an investor-friendly policy on FDI, under which FDI, up to 100%, is permitted, under the automatic route, in most sectors/activities. Significant changes have been made in the FDI policy regime in the recent times, to ensure that India remains increasingly attractive and investor-friendly.

Government plays an active role in the promotion of investment in all sectors, including in labour-intensive industries, through dissemination of information on the investment climate and opportunities in India and by advising prospective investors about investment policies and procedures and opportunities. International Cooperation for industrial partnerships is solicited both through bilateral and multilateral arrangements. It also coordinates with apex industry associations, such as FICCI, CII and ASSOCHAM, in their activities relating to promotion of industrial cooperation, both through bilateral and multilateral initiatives intended to stimulate inflow of foreign direct investment into India.

Government has also set up ‘Invest India’, a joint venture company between the Department of Industrial Policy & Promotion and FICCI, as a not-for-profit, single window facilitator, for prospective overseas investors and to act as a structured mechanism to attract investment.

The Foreign Investment Promotion Board (FIPB) was a government body that offered a single window clearance for proposals on Foreign Direct Investment (FDI) in India that were not allowed access through the automatic route. It was abolished in 2017 to reduce red-tapism and facilitate ease of doing business in foreign investments.

Henceforth, the work relating to processing of applications for FDI and approval of the Government thereon under the extant FDI Policy and FEMA, shall now be handled by the concerned Ministries/Departments in consultation with the Department of Industrial Policy & Promotion(DIPP), Ministry of Commerce, which will also issue the Standard Operating Procedure (SOP) for processing of applications and decision of the Government under the extant FDI policy.

Recent Changes in Investment Policy

The Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce and Industry, Government of India (GOI) recently released the consolidated foreign direct investment (FDI) policy circular of 2017 (New FDI Policy). The New FDI Policy is effective immediately from the date of its publication, i.e., 28 August 2017. The New FDI Policy supersedes the consolidated FDI policy of 2016 issued by the DIPP on 7 June 2016 (Erstwhile FDI Policy) and consolidates all the press notes issued by the DIPP post 7 June 2016 until 27 August 2017.

Key changes brought about in the FDI regime through the New FDI Policy have been set out in Part A below, and key changes by way of press notes/amendments to other laws and regulations, which have been consolidated in the New FDI Policy, have been set out in Part B below.

Part A: Key changes introduced through the New FDI Policy

FDI in LLPs: The Erstwhile FDI Policy was silent with respect to conversion of an FDI funded Limited Liability Partnership (LLP) into a company and vice versa. The New FDI Policy allows conversion of an FDI funded LLP operating in sectors/activities where (i) 100% FDI is allowed through the automatic route; and (ii) there are no FDI linked performance conditions, into a company, under the automatic route. Similarly, conversion of an FDI funded company operating in sectors/activities where (i) 100% FDI is allowed through the automatic route; and (ii) there are no FDI linked performance conditions, into an LLP, is permitted under the automatic route.

Downstream Investment Intimation: Under the Erstwhile FDI Policy, an entity was required to notify the Secretariat of Industrial Assistance (SIA), DIPP and Foreign Investment Policy Board (FIPB) of its downstream investment. The New FDI Policy requires such intimation to be made to the Reserve Bank of India (RBI) and the Foreign Investment Facilitation Portal.

With RBI as the intimating authority for downstream intimations under the New FDI Policy, we believe that the intimations are likely to be subject to greater scrutiny, which may not necessarily have been the case when the intimations were required to be made to SIA/DIPP/FIPB under the Erstwhile FDI Policy. Further, the New FDI Policy is silent on whether the intimation has to be made to regional offices of RBI or the central office of RBI.

Cash & Carry Wholesale Trading: Press Note 12 (2015 series) dated 24 November 2015 (PN 12) allowed a wholesale/ cash & carry trader to undertake single brand retail trading, subject to the conditions related to FDI in single brand retail trading sector. This change was subsequently incorporated in the Erstwhile FDI Policy. The New FDI Policy, by doing away with the reference of 'single brand', allows wholesale/cash & carry traders to undertake retail trading by way of both single brand retail trading as well as multi brand retail trading, through the same entity, subject to prescribed conditions.

FDI in Single Brand Retailing: Press Note 5 (2016 Series) dated 24 June 2016 (PN 5) has relaxed the local sourcing norms for a period of 3 years from commencement of business i.e., opening of the first store for entities undertaking single brand retail trading of products having 'state-of-art' and 'cutting-edge' technology and where local sourcing is not possible. Thereafter, provisions of paragraph 5.2.15.3 (2) (e) of the New FDI Policy, dealing with local sourcing norms will be applicable.

Apart from consolidating the aforesaid changes in the New FDI Policy, the New FDI Policy further provides that a committee under the chairmanship of Secretary, DIPP, with representatives from NITI Aayog, concerned administrative ministry and independent technical expert(s) on the subject will examine the claim of applicants on the issue of the products being in the nature of 'state-of-art' and 'cutting-edge' technology where local sourcing is not possible and give recommendations for such relaxation.

The setting up of a committee to determine whether the product is 'state-of-art' and possesses 'cutting-edge' technology is a welcome change. However, guiding parameters should be devised for the committee to determine whether a product is 'state-of-art' and possesses 'cutting-edge' technology. Further, such parameters should also be made publicly available, so that applicants are in a better position to ascertain whether their products are 'state-of-art' and have 'cutting-edge' technology.

The Erstwhile FDI Policy permitted a manufacturer to sell its products manufactured in India through wholesale and/or retail, including through e-commerce, without government approval. Note ii to paragraph 5.2.15.3 of the Erstwhile FDI Policy, granted similar permission to an Indian manufacture (i.e. the owner of an Indian brand which manufactures in India at least 70% of its products in terms of value in house, and, sources at most 30% of its products from Indian manufacturers). The New FDI Policy does away with provisions in respect of an Indian manufacturer.

Since the term 'manufacturer' would have covered an 'Indian manufacturer' within its ambit, the replicated provisions in relation to Indian manufacturers have been done away with by the New FDI Policy.

FDI in E-commerce: The Erstwhile FDI Policy prohibited an e-commerce entity from permitting more than 25% of the sales effected through its market place from one vendor or its group companies. The New FDI Policy clarifies that the 25% of sales value must be computed per financial year.

Fresh Approval for additional FDI: Under the Erstwhile FDI Policy, additional FDI into the same entity within the approved foreign equity percentage/or into a wholly owned subsidiary did not require fresh approval. The New FDI Policy has capped the additional FDI to a cumulative amount of INR 5,000 crore, beyond which, fresh approval will be required to be sought.

FDI linked performance conditions: Presently, FDI is permitted in LLPs operating in sectors/activities where: (i) 100% FDI is allowed through the automatic route; and (ii) there are no FDI linked performance conditions. While the Erstwhile FDI Policy was silent on what constituted FDI linked performance conditions, the New FDI Policy has defined FDI linked performance conditions as sector specific conditions for companies receiving foreign investment.

The Erstwhile FDI Policy was silent on what constituted FDI linked performance conditions. Upon having sought informal clarifications from the DIPP on what constituted FDI linked performance conditions, we were given to understand that milestones or other conditions connected with foreign investment, including any exit conditions or repatriation conditions as prescribed under the Erstwhile FDI policy with respect to any sector, will be treated as FDI linked performance conditions. On the other hand, one could have argued that only such conditions which are performance related are likely to get covered within the ambit of FDI linked performance conditions. The New FDI Policy puts this debate to rest by introducing the definition of FDI linked performance conditions. However, the definition introduced is so wide that most of sectors will be covered within its ambit.